A mutual fund pools money from various individuals, which it then invests into various assets like equities (stocks) and debt options. The fund is helmed by a fund manager. The fund manager through various strategies invests in the underlying asses based on the end-result the particular mutual fund is aiming for. For a new investor, mutual funds are the best way to invest, given that there are several categories and options available to choose from. Thus, they have the potential to fulfill needs across financial profiles and risk appetites.
While investing in mutual funds, there are several choices that a new investor will be faced with. Depending on the financial profile, age, risk, time horizon, etc., investors need to make the right choice, so as to unlock the full potential of their investment. Here are some things you need to check before investing in a fund:
Experience of the fund management team: A check over the experience of the fund management team may ensure that you give your hard-earned money in competent and deserving hands. The more experienced the fund manager, the higher chances of generating alpha (returns over and above the benchmark).
Investment objective: Every mutual fund scheme, irrespective of the category, i.e. equity or debt has an investment objective. It is this investment objective which entails them to invest in various asset classes in defined proportions. As investors, it is imperative to check the investment objective of the respective mutual fund scheme, and thereby see whether it aligns with your end goal. For example, if you have an objective of capital appreciation with a long-term investment horizon in mind and are willing to take risk, then equity oriented mutual funds will work better for you.
Past performance: You should compare the performance of the fund with others funds of the same category. One also needs to tally the results with a benchmark (for equity funds the benchmark is Nifty/Sensex). Number comparisons work only within the same category of funds. By the time you come to the stage when you are comparing performance numbers of different funds, you should already have a good idea of how much you will invest in that category.
Look closely at the costs: An exit load is the charge levied when you sell your units of a mutual fund within a particular tenure. As exit load is a fraction of the NAV, it eats into your investment value. Thus, it is important that you invest in a fund with a low exit load, and more importantly stay invested for the long term. There are other expenses like expense ratio, which need to be compared across similar funds. Comparing the fund’s costs and performance against those of similar funds will shed light as to the kind of value you’re getting for your money.
Tax implications: It is important to be aware of the tax implications of various mutual funds and their categories. Knowing up front about how much you’ll have to pay in tax will be prevent any surprises down the road.
Consistency: It is important to look at the uniformity of a fund’s performance before making a choice. For mutual fund rankings and /or analysis, one-year return of any mutual fund scheme is considered. But, that should not be the way to go about it. One should check the consistency of the mutual fund’s performance over 3-5 years. If it is irregular and unstable, then it is better to avoid such funds.
SIP: Investors vary of investing large amounts in mutual funds, can begin with funds as low as Rs500 periodically. SIPs allow investors to invest in mutual funds in a disciplined manner, irrespective of the volatility in the markets.
Now that we have understood how to choose the right mutual fund, let us understand the ways to invest in the mutual fund of our choice. One can invest online or offline or through direct plans as well as regular plans. Like everything else, each option has its limitations and advantages, which vary for each investor. Broadly, there are two basic ways an investor can invest in a mutual fund.
- Directly through the AMC: You can invest directly in the choice of your fund on their website by furnishing the necessary documents required, and completing the initial KYC. You can choose the plan you want and begin making your investment. This way has one major advantage i.e. no commission or distribution expense is charged, thus helping you save on costs and earn more return on investment. But, the major disadvantage of this path is that you will have to do your own research on which mutual fund will suit your goals and then make an informed decision. This is a very time-consuming process and if you are new to mutual funds, you may not be able to choose the right mutual fund for you.
- Indirectly through agent/app/intermediaries: Here, there is a lot of hand-holding involved and there will be someone to guide you through the whole process. You just need to give your requirements and furnish the necessary documents, and all the other procedural work will be completed for you. In fact, you will also get recommendations on the right mutual funds for your investment needs, and hence, it will save you from the time-consuming process of researching the multitude of options available. However, there is one major disadvantage through this method i.e. you are charged an upfront commission of up to 1.5% on your investment and a trail commission of up to 1.5% every year for as long as you are invested in the fund. So, this way will lead to higher costs.